Profile picture for kotovma

Keep refinancing after your ARM period expires?

I am considering taking out a 7/1 ARM loan over a 30 yr fixed loan for a $130K mortgage. My plan is to save on the mortgage payment each month and use that money each month directly towards principal. I guess this is a good place to ask: by paying more than my required payment - does that money go towards P or P+I?

By my calculations, by the end of 7 years, I would have paid $9K more towards principal and spent around $7K less on interest by going with ARM over 30 yr fixed.

This is where I have a general question about ARM: is there anything to prevent me from refinancing when the ARM period is over (7 years) and taking out another ARM (or even fixed) mortgage? That way I took advantage of low interest and paid more towards principal on my mortgage. I don't know much about this, but what is there to stop me from taking out ARMs continuously?

First time home buyer here, so don't judge :)
  • June 29 2011 - Austin
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Answers (10)

The Lifetime Cap is the amount the rate can increase over your start rate.  If you have a Lifetime Cap of 6%, add that to your starting interest rate for the maximum interest you can be charged after you enter adjustment period (subject also to maximum allowable periodic changes defined in your loan agreement).
  • May 08 2014
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Profile picture for rkbhossain
Do I understand it correctly that no matter what happens in the interest rate world, the lifetime cap of 6% (that i am being offered for my 7/1 year ARM) will protect me. That means in 7 years from now if the interest rate is 10%, i will still be paying 6%, right? In that sense, ARM is not so bad. What do you think?

First time buyer
  • May 08 2014
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Profile picture for kotovma
Again, I'm not planning on keeping this loan for all 30 years. I want to save money in the short term and use it to pay off more principal than I would otherwise. I'm pretty confident in being able to refinance a few years down the road based on the acceptable loan to value ranges...
  • June 30 2011
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Kotovma,
Are you planning to own the house beyond seven years or sell it? If the former, I'd suggest a fixed rate loan - possibly a 15 year term, which will save you money. If the latter, it's an acceptable option.

Good luck!
  • June 30 2011
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Profile picture for daveskow
 Q:what is an "acceptable" range of loan to house value necessary to qualify for a loan?

A: Ideally 80% ltv ( loan to value ) or  lower
  • June 29 2011
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Profile picture for kotovma
Thanks for the replies, guys. The particular 7/1 ARM I'm looking at has a fixed rate for 84 months, so I don't have to worry about not being able to afford the payments for at least those 7 years. The way I see it is that I can refinance then if rates jump to unacceptable levels.

The house value though is a good point. So what is an "acceptable" range of loan to house value necessary to qualify for a loan? I realize it may not be black and white, but I'm just curious for a ball park figure.
  • June 29 2011
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Profile picture for the_country_hick
One thing can easily prevent you from refinancing. The house price dropped or your financial situation changed.

We are having the lowest rates in a very long time. The federal reserve has been printing a lot of extra money diluting all of the money pre-existing that increase with nothing more backing the money up. In time that will cause inflation. The only cure to inflation is (much) higher interest rates.

Be smart, get a fixed rate loan and do not get caught with a resetting mortgage that went up a major amount in the days of over 10% interest rates.

I refer to an ARM as a financial suicide machine. It can reset and recast so your payment jumps so high you can not afford to pay the monthly payment.  It already happened and is causing many of the foreclosures we see today and will see tomorrow.
  • June 29 2011
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Profile picture for daveskow
Q: I guess this is a good place to ask: by paying more than my required payment - does that money go towards P or P+I?

A: any extra payment you make will be applied to the balance ( prin.) of the loan

By my calculations, by the end of 7 years, I would have paid $9K more towards principal and spent around $7K less on interest by going with ARM over 30 yr fixed.

Q:is there anything to prevent me from refinancing when the ARM period is over (7 years) and taking out another ARM (or even fixed) mortgage?
 
A: no .....not unless the present ARM you have would have soem sort of unusual prepayment penalty tied to it ...the other thing to mention is that you would still need to be able to qualify for a new loan and the loan to value will still need to fall into acceptable range

  • June 29 2011
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One other note...

Many people who had ARM loans in the past found out that they could not afford the monthly payment after their rate adjusted. Since home prices have fallen so much over the past few years, these people are not able to refinance because they are upside down.

Again, the safest thing is to go with a 30 year fixed rate.

Personally, I have an ARM on my home and it has worked out great for me. I was able to afford the higher payment when it adjusted in the 6th year. In the 7th and 8th years, the rate dropped considerably.
  • June 29 2011
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Many people refinance from ARM to ARM when their existing ARM is set to adjust.   The risk involved is that you will not know what rates will be in 7 years. They most likely will be higher than they are right now.   You need to weigh the benefit of getting a lower rate today vs. the risk of a higher rate in the future.

The other risk to consider is what happens if the value of your home drops and you are either unable to refinance OR have to take a new loan with mortgage insurance.

The safest bet is to lock into a 30 year fixed
  • June 29 2011
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